By Jerry Fireman

A custom cost-estimation tool plays a major role in the success of four current projects at defense contractor Raytheon, helping to achieve profitability and 98% higher levels of reliability. This achievement is remarkable considering the defense industry is experiencing across the board cost overruns, and these overruns have, in many cases, reduced or eliminated profitability on many defense projects.

To reverse this trend, Raytheon worked closely with Galorath Inc. to develop a custom estimating tool called RAYCOST that is based largely on Galorath’s SEER-DFM (design for manufacturability) package. Raytheon's engineers RAYCOST daily to evaluate the cost of a wide range of design alternatives and reduce the risk of cost increases in various subsystems.

"We now use RAYCOST every day to keep expenses down by considering cost in the earliest stages of the design," said Quentin Redman, Senior Department Manager for Raytheon. "Even after the project goes into production, we still use the tool nearly every day to evaluate cost-reduction opportunities. The first project that we used these methods on, the AIM-9X missile has become a showcase for the benefits of structured cost estimation. As a result we have used these same methods on three more recent major programs, including the Evolved SeaSparrow Missile, and we have experienced similar results."

The AIM-9X Evolved Sidewinder.

Raytheon’s first project, the AIM-9X Evolved Sidewinder is the latest member of the AIM-9 short-range air-to-air missile family currently in use by more than 40 nations. The second project, the Evolved SeaSparrow, is an international cooperative upgrade of the RIM-7 NATO SeaSparrow missile. The new missile provides the air defense for ships of the 10 participating NATO navies. The two other RAYCOST projects are classified.

Guarantee and a Fixed-Price Contract

To win the role as prime contractor on most of these programs from the government, Raytheon had to provide a firm, fixed price for a total package that included development and production of a fixed number of missiles. On the AIM-9X program, for example, Raytheon guaranteed a 98% reliability factor over the life of the program.

The combination of the guarantee and the fixed price contract represented a significant risk and meant that Raytheon needed to execute these programs almost perfectly to achieve the company’s profitability goals. On previous programs, Raytheon engineers used spreadsheets to analyze material quotes from vendors, estimate internal labor and material costs as well as other cost factors on. But a number of weaknesses soon became obvious with this approach, such as the unwieldy size of the spreadsheets, the opportunity for errors, and the inability to factor in risks. Managers also realized that the complexity of the AIM-9X and ESSM programs would generate such large spreadsheets that there would be no way to validate their accuracy.

The Evolved SeaSparrow missile being launched.

"We looked at the main commercial packages, all of which we were using in some part of our organization," Redman said. "SEER-DFM was the one that we felt came the closest to meeting our requirements. But even it fell short in one key area. We use the Six Sigma process-improvement methodology on projects on a regular basis to improve quality and reduce costs and we wanted the ability to track these projects with our estimating tool. Six Sigma is a rigorous and disciplined methodology that uses data and statistical analysis to measure and improve a company's operational performance by identifying and eliminating 'defects' in manufacturing and service-related processes. We talked to Galorath and they said they would be happy to work with us to develop a custom tool built upon SEER-DFM that added that functionality. We developed a great working relationship during the project and the final result met all of our expectations."

A screen shot of the RAYCOST software.

Raytheon also provided its own cost estimation algorithms to Galorath and these were incorporated into the RAYCOST tool as well. A Galorath team led by Karen McRitchie, vice president of development, encapsulated each model in a plug-in, taking advantage of the SEER-DFM architecture that provides the framework to easily integrate custom models. Each plug-in is built as a separate executable in the form of DLLs (dynamic link libraries) that carries a database with process information.

Considering Cost as an Independent Variable

In previous missile systems as well as nearly every other defense project, designers have taken the basic approach of designing to the requirements and then trying to reduce the cost to make budget. The problem with this method is that cost isn’t considered until the design is largely fixed, at a point when it’s too late to have a major impact. But Raytheon engineers used RAYCOST from the beginning of these programs to consider cost and risk as independent variables.

"Having a tool that could accurately evaluate the cost of various options at an early stage in the program made it possible to give our employees and suppliers cost objectives from the very start and incentivize them to meet them," Redman said. "Even the very high-level estimates that the software provided in the early stages were useful because they got engineers thinking from the start about what sort of budget should be assigned to each subsystem. This forced them to make necessary tradeoffs, including thinking about whether performance could be reduced while still meeting the goals of the program objectives in some areas. By the way, the earliest estimates turned out to have errors of between 25% and 30% when compared to actual costs, which is far, far better than we were able to obtain with our previous methods."

A different look at the AIM-9X Evolved Sidewinder in launch.

With SEER-DFM and other leading-edge tools, engineers can enter information at the very start of a program that makes it possible to begin to distinguish between the cost of various design options. In the earlier phases, engineers typically work at a fairly high level, such as by directly estimating the costs of the major subsystems of a program. As the program progresses, they can continue to enter more and more detailed information into the model without abandoning the basic framework. This basic process was repeated at finer and finer levels of granularity as the program continued. This fits the design process perfectly since it's almost inevitable that in any program, the design process will advance at a different pace in different subsystems. Raytheon engineers can easily integrate various models at any level of detail while instantly updating the effect of changes on the overall cost model as they progress.

Taking Risk into Account

The ability to enter risk was an important aspect of the success of these programs. For each estimate, engineers entered three possible costs: least, likely, and highest. These figures were automatically rolled up at the subsystem and program level. This made it easy to identify areas of the program that had higher than normal risk. In some cases, the decision was made to go with costlier but less risky technology while in other cases additional engineering resources were deployed to reduce the risk factor. The model also included a learning curve that estimated the reduction in program cost over the life of the program and these estimates turned out to be accurate within a percent or two.

The AIM-9X Evolved Sidewinder from a different perspective.

"During the life of these programs to date, RAYCOST has proven to be an indispensable cost management tool that has significantly contributed to overall program success," Redman concluded. "Probably the most important benefit is the ability to measure costs from the earliest part of the program, allowing both our own and our subcontractor’s engineers to think about cost up front. To encourage this line of thought, we have made it clear to the entire design team that their performance would be judged not only on meeting the design specification but also, to a large degree, on cost. RAYCOST made it possible to provide tough but realistic goals and measure and monitor the progress of each design group. This is something that was impossible in the past because our measurement tools were so inaccurate and cumbersome. With RAYCOST, the AIM-9X program has been a huge winner and has even been called out by the Navy as a success story in their Cost As an Independent Variable (CAIV) effort. The other three programs where we have used the tool appear to be equally successful. We have maintained our original cost estimates to date and as a result we are achieving a very satisfactory level of profitability."

Jerry Fireman is president of Structured Information, a technology consultancy in Lexington, Massachusetts. Send your comments about this article through e-mail by clicking here. Please reference "Cost Estimation, June 2006" in your message.

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For More Information

Galorath, Inc.
El Segundo, CA